RSEs may get more time to meet net worth criterion

In what comes as a breather for regional stock exchanges (RSEs), the Securities and Exchange Board of India (Sebi), which has asked RSEs to provide a road map on their plans to meet the mandatory Rs 100-crore net worth criterion, may now allow these to start operations if they meet the target in three years, sources said.

The criterion on net worth was a major deterrent to RSEs in starting operations. Of the 16 RSEs in the country, only the Calcutta Stock Exchange (CSE) is an active entity. To revive itself and meet the net-worth criterion, the Ahmedabad Stock Exchange had planned to sell property. The exchange was also in talks to merge the Baroda Stock Exchange and the Rajkot Stock Exchange with it. However, the two exchanges have delayed the negotiations, said an exchange official from Gujarat.

Shareholders and members of RSEs had planned to drag Sebi to court for stipulating stringent norms for RSEs after the de-mutualisation process, which they said was akin to a retrospective amendment. It would also lead to complete closure and winding up of operations, they alleged.

Most RSEs cite the Securities Contract and Regulation Act, according to which an RSE can be closed only if it is found acting against public or trade interest. Even in this case, discussions between exchanges and the regulator are required, they say. These exchanges are also against the Rs 1,000-crore trading turnover criterion and the five per cent cap on shareholding (except for a select category of shareholders).

The Uttar Pradesh Stock Exchange Brokers Association has written to the finance minister, claiming Sebi’s norms were favourable for the BSE and the National Stock Exchange (NSE). An official at a private equity fund (which is a shareholder in an RSE) said Sebi’s new norms were similar to money grab. “Why was the de-mutualisation process carried out before bringing in the new guidelines?” asked a member broker.

In 2007, stock exchanges were de-mutualised and the finance ministry, with many a promise, lured new shareholders to invest in these.

In its letter, the Uttar Pradesh Stock Exchange Brokers Association stated Sebi had ignored all rules and regulations.

“There is a difference between national stock exchanges like the BSE and the NSE, and yet, the same criteria for these were not acceptable,” said an Uttar Pradesh Stock Exchange shareholder.

The 949 suspended companies on the BSE, with 89.78 billion shares of values ranging from Rs 20 to Rs 500 (worth about Rs 1.8 lakh crore), had resulted in losses for investors. And, these investors haven’t been compensated from the investor protection and education funds.

The letter adds Sebi didn't provide enough support to RSEs; its move to grant approvals to the BSE and the NSE to work in the RSE areas, as well as its approval to brokers of these exchanges to establish and maintain their terminals, hit the RSEs hard. It also forced RSE brokers to work on BSE and NSE terminals. Brokers in Uttar Pradesh said Sebi was keen to suspend the companies in which small investors lost about Rs 1 lakh crore, but it favoured closing the RSEs, which could favour national level exchanges. The Uttar Pradesh Stock Exchange said though its turnover had exceeded Rs 1,000 crore, it was due to this discrimination that it found it difficult to continue operations.

The five per cent cap on shareholding is another major hurdle for RSEs, say experts. Though various institutions were keen to revive these exchanges, immense effort to acquire a stake of only five per wasn't worth it, they added.